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How Home Capital, housing bubble are feeding loonie's downfall

Briefing highlights

  • Home Capital, housing feed loonie's fall
  • Jobless rate dips to 6.5%
  • U.S. job growth rebounds
  • Air Canada swings to a loss
  • TransCanada profit more than doubles

Driving down the loonie

Not to be overlooked in the downfall of the loonie is the role of Home Capital Group Inc. and the broader housing market.

With oil prices tumbling and Canada-U.S. trade tensions mounting, it’s easy to lose sight of how the turmoil at Home Capital and the angst over Toronto’s housing bubble have helped make the loonie the “ugly duckling of the currency world,” as National Bank puts it.

“I think it has been a vital part of the narrative,” said Mark McCormick, North American head of foreign exchange strategy at TD Securities.

“The last few weeks have seen the Home Capital news, the introduction of regulatory reform to cool the Toronto housing market, trade spats with the U.S. and some softer data.”

To recap:

The Canadian dollar has been eroding fast, sinking today to as low as 72.5 cents (U.S.), though later pulling back up to around the 73-cent mark.

The currency has been damaged by oil prices, U.S. countervailing duties on softwood lumber, and the fact that the Federal Reserve is raising interest rates while Governor Stephen Poloz and his Bank of Canada colleagues aren’t likely to do so for some time.

Then there’s Home Capital, the alternative mortgage lender that has been bleeding deposits and is caught up in a regulatory probe, seeking options.

Alongside that are broader fears over home prices in and around Toronto, which recently prompted the Ontario government to intervene with measures to hose the area down.

Markets, Mr. McCormick said, have until recently “started to get a bit bullish” on the Bank of Canada raising its benchmark rate next year. Until “this abrupt change to the narrative” on housing, that is.

“That means the market was not positioned for this sequence of events and now the price action is becoming self-reinforcing as momentum traders pile on,” he added.

“We think it is overdone but needs a trigger (Poloz or data, perhaps) to stall momentum.”

It’s not that Home Capital is a big player.

Indeed, Mark Chandler and Simon Deeley of RBC Dominion Securities noted in a report that “the size of the uninsured portfolio represents less than 1 per cent of all outstanding mortgages in the country, and there have been no signs of significant stress in the performance of mortgages elsewhere.”

But “concerns about the cost and availability of funding have raised questions about growth in overall mortgage lending going forward,” they said.

Mr. Chandler, RBC’s head of Canadian fixed income and currency strategy, said separately that it’s difficult to gauge the precise impact on the loonie.

“Since last Thursday, we are in the same group as other commodity currencies, so I would not put it as the primary culprit,” Mr. Chandler said.

“But capturing the period up to the HCG price drop (say, over the past month), I would say that concerns about the housing/mortgage system would have contributed something (perhaps a bit less than 1 per cent) to CAD weakness,” he added, referring to the Canadian dollar by its symbol.

Bipan Rai, executive director of macro strategy at CIBC World Markets, while also citing trade tensions, agreed Home Capital is playing a role. He believes both are legitimate but overstated.

The housing market angst “has been exacerbated with the Home Capital Group (HCG) situation and remains the key hot button issue for asset managers outside of the country, it seems,” Mr. Rai said in a report.

“There’s definitely a premium that’s partially priced into the loonie based on whether or not concerns regarding the housing market cascade,” he said separately.

“The Home Capital Group situation is not a systemic risk to the broader housing market, so we’d expect this premium to shrink.”

There are many factors at play going forward, said National Bank chief economist Stéfane Marion, who referred to the loonie as “the ugly duckling of the currency world in 2017.”

Jobless rate dips

Canada didn’t churn out a lot of jobs last month, but unemployment is now down to 6.5 per cent, the lowest since the crisis was starting to bite in October, 2008.

The overall number of new jobs didn’t change that much because the country lost 31,000 full-time positions and gained 34,000 in part-time work.

The jobless rate dropped, Statistics Canada said, largely because fewer young people were hunting for work, and thus not counted.

“Jobs were up a slim 3,000 on the month, although the composition suggests some slippage in overall quality,” said CIBC economist Nick Exarhos, noting that the jobless rate is now low “by historical standards.”

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